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On the eve of iPad 2.0, it’s time to think again about this curious new computer. My intuition tells me that this product category will behave very differently from the iPhone and will not be subject to the same sales ramp.

The iPad has been on the market for less than a year but it’s still a puzzle for many. It’s a product that’s often seen as an iPhone product line extension. From a hardware point of view, it certainly seems to be. It has an almost identical internal architecture and uses almost the same software. An engineer would look at it and reasonably say it’s the same thing.

However, from the way it’s used and the way it’s sold, it has very little in common with its smaller cousin. There are plenty of experts who can detail how the products are used differently, but I would highlight the portability of the iPhone makes it suitable for a completely different set of tasks than the less portable but more immersive iPad.

But what I want to dwell on here is how differently the products are sold.

I’ll build the case from evidence that Apple provides. The most important observation is that the iPad is an unlocked product. Although you can hire an operator to provide you with data services for it, the product is designed not to rely on that. As a result the product is effectively “divorced” from the operator channel. This means it does not typically benefit (or suffer) from subsidy.

This may seem an interesting side-note to the iPad story, but I think this is a central pillar of the market strategy. The iPhone was designed around a high-ARPU data plan. I’ve even suggested that the iPhone is nothing more than a data plan wrapped in glass and polished metal. Because it was designed to enable migration of cellular voice users to data plans, it’s priced to skim profits from the migration. At some future point in time when a skimming strategy is no longer optimal, the iPhone might be re-positioned for penetration, but that time is not now.

As part of a skimming strategy, the iPhone has a limited distribution channel. It’s only sold through special agreement with selected operators. Again, timing is crucial. That channel is expanding, but for nearly four years the product has not been positioned for sale through any channel other than Apple retail and Operator retail.

On the other hand, the iPad is marketed for penetration. It had a low price and an unlimited distribution strategy. It could be sold through any consumer electronics product point of sale. And then some. It could conceivably be sold through as many if not more points of sale as the iPod (i.e. tens of thousands.)

It can be sold in any country, can be distributed through middlemen and can be priced arbitrarily [1]. It can be bought in bulk by companies or schools or hospitals. It can be re-sold in a secondary market. It is essentially a perfectly liquid commodity.

Now we can step back and ask why and what are the implications for competitors.

The reason the iPad was positioned asymmetrically to the iPhone is, I believe, because it could be. I believe that the iPhone is sold the way it is (through operators) because that’s the only way it could be sold effectively. Cellular products have always come with lots of fine print, footnotes and asterisks rooted in the regulatory environment that underlies the industry.

The iPad is a product built and sold along the lines of the Mac and the iPod–unrestricted by orifices and aligned with the unregulated environment that computers have always enjoyed. Essentially, for the iPhone, Apple chose to go along with the telecom industry’s rules but as soon as it had a product that did not need to comply to those rules, it ran back to its comfort zone: control.

If we take this to be the cause, the implications for competitors become clearer. Apple is more in its element selling the iPad than it is in selling the iPhone. Other tablet contenders however are in an opposite strategic stance. Almost all the credible tablet alternatives rely on the telecom channel for distribution. The rush to build iPad alternatives is as predictable as the derision that was poured on the product when it was launched.

But the alternative products are positioned in different ways. They are positioned as big phones.

Which brings me to my final point: selling big phones is hard.

These products are not compliant with what users expect from an operator: a service plan. As a result they are also not competitively priced with the iPad. Apple engineered a price for the iPad that makes comparisons extremely favorable. Buyers know the thing they are buying is not a phone so they look at the price carefully.

But the most crucial weakness of alternative vendors is the fact that operators don’t know how to sell tablets. Tablets are small computers. They are bought in the same way that buyers buy laptops: in-store testing. Notice that except for the iPhone operators only provide phone mockups in their stores. This is because they want buyers to discuss their purchase with a sales rep. This is not the way laptop hunters shop. Another tell-tale sign of a disconnect between operators and tablets is that operator shops are physically tiny. PCs (and tablets) need large tables for users to look, touch, heft and fondle. Just on square feet alone, operators and tablets are not a good match.

If you need any more evidence, consider the plight of operator-subsidized netbooks.

—

Notes:

I realize that this is not currently true and the distribution is limited but that’s only a matter of supply constraints. There is no theoretical positioning limitation.

Apple has huge margins to play with on the iPhone (~60%) and could easily undercut its competitors but probably doesn't because they look at it as their premium for dealing with the risk of having less control.

famousringo

I think Apple declines to drive volume by cutting price simply because they have no more volume to drive. They're rapidly ramping up production just to keep up with demand. The smartphone market is growing so rapidly right now that just keeping pace is a huge ordeal.

Until some slack shows up in the supply capacity, there's no reason to stimulate more demand than they can serve. Much better for Apple to expand laterally by broadening carrier distribution — grabbing that top 20% in all markets — than to cut margins and delve into more price-conscious customers.

http://standardimagination.com StdImagination

If Apple drops the minimum iPad purchase price or adds a low end variety to it's iPad line (even if that is in the form of continuing to offer iPad1 at a lower price as it does with older models of iPhone), I'd expect the iPad to perform the way the iPod did… as opposed to the iPhone. When iPod started to explode there were a number of MP3 player competitors that worked well, looked good, and were made by impressive brands… but they faded into obscurity. And that was before Apple developed a best-in-class brick-and-mortar and online retail presence.

FalKirk

I could be proven wrong as early as Wednesday, but I don't believe that Apple will continue to sell the iPad 1 at a new, lower price. Tablets are not like phones. They are not (effectively) subsidized and there is no lower cost tablet competing with the iPad the way lower cost phones are competing with the iPhone. No competitor has been able to even match the iPad's price let alone beat it.

Joe_Winfield_IL

I hope you're proven wrong. The original iPad will be a substantial bump up – cameras are a differentiating feature, more so than performance or size improvements. Most customers will choose the newer, better models. But there are two benefits of keeping the old ones:

1) A price point of $399 unsubsidized builds a sizable moat around iPad. Today there are no viable competitors in terms of price, but Apple only updates once yearly. I'd hate to see Samsung gain traction this Christmas season by undercutting the price of iPad with a shiny new product. With a $399 iPad, competitors will really struggle to make a usable product at a better price.

Keeping the possible cannibalization aside…even if apple wants to …doesn't mean it can. We also have to consider the actual amount of units apple can produce…lower priced iPad n-1 would mean higher volumes, as it is apple is struggling to meet demand…this would mean additional strain on the production setup

gslusher

"Today there are no viable competitors in terms of price, but Apple only updates once yearly. I'd hate to see Samsung gain traction this Christmas season by undercutting the price of iPad with a shiny new product."

John Gruber of Daring Fireball suggests that Apple may update the iPad AGAIN at about the same time as the iPods and switch the iPad to the same update cycle.

Joe_Winfield_IL

I've heard that rumor as well. It would make sense to capitalize on holiday shopping with something new; it's no coincidence that iPods are refreshed when they are each year. I'm a bit skeptical (about iPad 2.5), as production changes are expensive. Asymco has spoken about the annual cycle a few times when describing the challenges in iPhone growth. However, it would likely only be a one-time change and a strategic decision to update later in the year.

Waveney

Actually there are several more reasons to keep the original iPad in production – mainly for business adoption.
No camera ~ security
No usb ~ ditto
Proven technology ie no software catch-up or optimisation needed for new chip.
Should be able to be bought at discount for businesses(I'm reminded of various Macs which were kept in production for education, long after their desktop equivalents had been upgraded, because that was all schools needed and could afford)
Great battery life ~ may not be as good with newer/faster chip
…among others

vroddrew

Apple doesn't need to do that. Nor do they need to drop the retail price. Early adopters will sell their "barely used" iPad v1 on eBay and Craigslist for $300-400 or so in order to finance their purchase of the new model. Thus creating what no manufacturer in the world can do: a fully functional iPad at a price even Apple can't meet. Given the choice between this, and spending $800 for a Xoom, I suspect many hesitant consumers will choose the "used" iPad.

This is similar to what Alfred Sloan did with the "annual model year" in the early days of GM. GM eventually fell on hard times, but Sloan's genius created one of the great industrial and financial powers of the 20th century.

Joe_Winfield_IL

Good call! Technically you can buy them at discounted prices, but it's a clearance sale. You win.

http://twitter.com/davidchu @davidchu

To add onto Falkirk's point, I don't see the upside from the hardware end of introducing a $399 tablet. There is already a short supply for 10" touch screens. So if you had one, would you rather use it to chase $399 or $499 at the very least?

Although Steve Jobs has said that a 7" tablet is a tweener, I've heard multiple times that Apple has already tested the form factor and figured out how to make it if they want to. I see that as a more likely scenario for Apple to introduce a cheaper tablet although I think they would market it as a larger iPod. I also think there is a space for it in the market after playing with my friend's Galaxy Tab. It's probably just too early to introduce to the market at this time. The focus right now should remain on the full sized iPad so as to not confuse the customer.

CndnRschr

The upside for Apple would be to further hammer away at the price advantage. Of course they'd rather sell us a better and more expensive iPad2 (or at the same price as current iPads) but if they want to pull the rug from the emerging competition, what better way than to provide yet more AppStore buyers to keep the developers focused on the iPad/iPod platforms?

That said, I think Apple will quickly sell off remaining iPad1 inventory and focus on iPad2, perhaps making it a little more price competitive. The more units they sell, the better the economy of scale and hold on component suppliers. You can bet that whomever is making Xoom components has not invested in tooling form million of sales. Indeed, the deluge of Android tablets will simply fragment their sales making it even harder for them to complete with component pricing.

http://twitter.com/davidchu @davidchu

Okay. I'm eating my one crow now.

http://twitter.com/davidchu @davidchu

*own*

CndnRschr

Will be interesting to see how long iPad Classics are available. Bet they sell more iPad originals from today than many of the new competitors launched over the next few months.

http://standardimagination.com StdImagination

An iPad at $299.00 would make it enormously difficult for competitors to match feature for cost. They're clearly already struggling with this otherwise xoom would have debuted at a lower price point.

With advance purchases of key components allowing for price cuts while maintaining margins, Apple could eliminate much of the competition before it gestates.

WaltFrench

Fer shure, giving 'em away would knock out the competition. But Apple's closest competition is the Xoom, Playbook and TouchPad, all probably priced around $800, and if Apple can add the very approx $50 of CPU, RAM, cameras and denser battery, while holding the line on the entry level $499, then they already have an intense value proposition in their favor (or, I presume they THINK they would), given the iOS ecosystem talk we keep hearing about.

Maybe shaving the cost for the 64GB models, or the with-radio option, just to make a point that you can't spend as much on the iPad as you must with the Xoom. (Funny how “choice” doesn't matter to sites like PC Mag when it's the Xoom's single-price-point versus Apple's 6.)

Regards continuing last year's model: Why, if you're supply constrained? To compete against the junk tablets with no support, no software upgrades, no ecosystem? Best way to compete with them is to secretly encourage Target, WalMart and Macy's to tout them, leaving their customers totally burned. The cheapos will so totally foul their nests that anything-but-Apple looks like a joke.

If there is a 7" (or 5" or 6") I believe it will be a bigger iPod touch, not a smaller iPad. iPad apps won't run well scaled down, but iPhone apps scaled up to that amount would be OK. Resolution would stay the same as the current iPod touch.

Joe_Winfield_IL

I take all of the supply chain stuff with more than a grain of salt. I agree that in a supply constrained scenario, Apple will chase the revenue of the newer version. However, I don't take it as granted that Apple will be unable to manufacture enough of both devices. Also (just my guess), most consumers will favor the newer, better devices anyway. Apple won't need massive volumes of n-1 iPads to satisfy demand; they need only offer a lower-priced alternative to ruin things for would be competitors. Presumably, they would still be profitable, albeit at smaller margins.

This single move (cheaper v1 iPad), more than anything else, gives Apple a chance to put Android another 6-12 months behind the curve. Long term, this could lead to a great deal more upside than the finite downside of a cheaper iPad. I think Apple smells blood in the water, and they will go for the kill by sealing out competitors with price.

http://www.noisetech-software.com/Perspectives.html Steven Noyes

I would argue that Apple already does have a lower priced tablet on the market and has for 3+ years:

an 8GB 3.5" at 229.
a 32GB 3.5" at 299.
a 64GB 3.5" at 399.

Steven

FalKirk

Agreed. The iPod Touch, the iPhone and the iPad are to iOS line what the Shuffle, the Nano and the iPod Classic are to the iPod line.

Alan

A datapoint for your theory: I spoke with a friend who is a big Android fan. He went to the mall to see the Xoom at the Verizon store. He said, "Apple must have some deal with them: There was a table right in front with 8 iPads on it. The Xoom was way in the back and there was only one of them. I had to wait to see it while there were many iPads available to try out".

Hamranhansenhansen

Typical suspicious Apple hater.

The "deal" Apple has with Verizon is iPad is successful. It brings in a ton of foot traffic and generates a ton of sales. Basically, nothing succeeds like success.

Motorola just putting out a tablet with Verizon is step 1. WTF is a XOOM? Nobody cares.

http://standardimagination.com StdImagination

Android Tablets – OS by an advertising company, Hardware by a TV company, Sales by a phone company. What could go wrong?

WaltFrench

Software dependent on Adobe?

huxley

Not dependent yet (Xoom doesn't ship with Flash).

As per usual, Adobe is late even to the Honeycomb 3 game.

http://www.eliainsider.com Elia Freedman

I wanted to point out that the ramifications are huge. Apple's distribution chops gives the company a huge advantage over, in particular, the Android and Windows Phone 7 licensees, who have little to no experience selling into channel. (Theoretically, Samsung does but their Android tablets are being manufacture red and marketed by their smartphone division, which doesn't.) If you will excuse my cross-posting, I wrote about this in January: http://eliainsider.com/2011/01/10/apple-will-domi…

Hamranhansenhansen

That is a good article, except I disagree that Apple did not create the first mass market PC. They most certainly did. That is the Apple II. There were other computers in 1977, even small computers, but none that qualified as PC's except Apple II. Selling 16,000 PC's into people's homes in 1977 is HUGE numbers! I don't know if you realize how few PC's were sold each year even 10-15 years after that, when people knew what a PC was. The only reason IBM even made a PC, 5 full years after Apple II first shipped, was their sales reps were going into businesses and seeing Apple II's running VisiCalc being preferred over giant IBM computers costing hundreds of thousands of dollars. IBM cloned the Apple II and later Microsoft cloned the Mac and later Microsoft cloned the iPod and later Google cloned the iPhone and later HP cloned the iPad. The difference in the 21st century is Apple is the biggest player now, and the common computing platform is the open Web which nobody can monopolize, and MPEG-4 is like that for music and movies. And Apple adds value to both with App Store and iTunes Store, giving them a tremendous advantage. Google's tiny Android division (which is hated by most people within Google) and their cadre of unprofitable handset makers are no 1982 IBM or 1990 Microsoft. Even today's Microsoft is no 1990 Microsoft. Further, Apple has the economies of scale thanks to the Chinese manufacturers. So Apple is in a position to launch a product like iPad and dominate the market with it without being successfully cloned.

eyez00

>>The only reason IBM even made a PC, 5 full years after Apple II first shipped, was their sales reps were going into businesses and seeing Apple II's running VisiCalc being preferred over giant IBM computers costing hundreds of thousands of dollars<<

That's not strictly accurate, it was demand driven with the Accounts Department, who wanted spreadsheets going to Data Processing and demanding "Lotus 1-2-3", the first "killer app".

IT (who they then?) then went to their computer supplier (IBM) and IBM supplied PCs.

Remember, back in the 70s/80s Big Blue were so dominant in the market that they vetted their customers for suitability.

If they thought you were'nt sufficiently large a volume customer, they wouldn't supply you. So you had to buy PCs in bulk in order to qualify as customer, even if you ran a giant DP process. See why the clone makers happened? "Unsuccessful" IBM customers or DEC users had to buy cheaper No Name brands like Dell or Compaq.

VisiCalc was good, better than SimpliCalc, but it wasn't as good as Lotus 1-2-3.

Dick Applebaum

You need to check your dates and facts!

I worked for IBM 1964-1980. !973-1980 were in the Palo Alto System Center — across Page Mill Road from HP…

!n 1978, with 2 partners I opened the 5th computer store in Silicon Valley: Computer Plus, Inc. in Sunnyvale.

VisiCalc was beta tested by my partner and was released in 1979.

VisiCalc sold for $99 AIR (could have been $79) — but it didn't matter — most copies of VisiCalc sold an additional $3,000-$15,000 worth of loaded Apple ][s, printers, hard disk drives, etc.

Sure, it was an improvement on VisiCalc — but VisiCalc created the market.

Yowsers

"Google's tiny Android division (which is hated by most people within Google) …"

Interesting. First I've heard of it. I suppose it could be due to inter-departmental rivalries and jealousies. That would be typical. Do you have connections inside GOOG that reveal this?

http://www.noisetech-software.com/Perspectives.html Steven Noyes

I have heard there is a big rift between the Chrome OS people and the Android team with Chrome OS being more aligned with the companies long term strategies.

But this is from a friend of a friend and I have no idea if it is true. Also, this was 6-10 months ago.

Evan

rivalry is different from hating.

Luis Masanti

As you pointed out, Apple likes "control."
(Maybe, it is that Apple learned from its past of "no control" that almost lead the company to disaster.)

In that way, I think that the iPhone's business model is just a "temporary compromise."
If we take into account the patents about the "virtual SIM," we can suspect that Apple, at some point, is looking for an iPhone's business model that can avoid enterely the telcos. Even, with the "carrier bidding patent," Apple could possible benifit users with lower calls&data plans.

Then, all Apple products will be in the same ground, the one that Apple knows best: consumers products.

Hamranhansenhansen

A friend of mine who is not very technical asked me: what are these rumors of Apple having a "virtual SIM" and "carrier bidding"? I told him basically where it says AT&T on your iPhone, that could change to an Apple logo and your phone would use whatever network was ideal from moment to moment, and he said, "you had me at Apple logo." The carriers are the biggest bug in iPhone and iPad.

Fake Tim Cook

Is your friend Jerry Maguire?

Rob Scott

This "operators don’t know how to sell tablets" is so true. We do not have the iPad yet so we have been trying the Android variant(s) and it has been hard selling these things.

1). They are expensive
2). The spend (ASPU) doesn't justify the subsidies that we normally apply to voice driven devices

Having said that we are the biggest "buyers" of PCs (by offering an interest (and margin) free purchase plan). I suspect we will be the biggest buyers/distributors of tablets but the volumes will be a fraction of what we move in smartphones.

I suspect that this an area where Android is going to have to work very hard to surpass iOS.
Another bet is that tablets are going to be bigger than PCs, and that might change everything.

http://twitter.com/davidchu @davidchu

Hey Rob. If I remember correctly, you're out in South Africa right? When I was out there, a lot of people I met didn't know what an iPad was.

Rob Scott

"At some future point in time when a skimming strategy is no longer optimal, the iPhone might be re-positioned for penetration, but that time is not now."

I differ strongly with you on this. Apple cannot afford to let Android own this low – medium priced market . Truth be told Apple has run out of time on this. If Apple does not release a budget iPhone in June/July then they will have ceded the market completely to Android and that is not in Apple's interest.

I expect Apple to release a budget iPhone June this year. I actually expect Apple to release a range of iPhones, starting from $200.00 to $600.

mbaDad

The price between an Android and iPhone is really almost nothing. The data plans are the same (nearly), and that is the big expense. The biggest difference has been what network you can get the device on, and in the US Android is sold by all carriers, even the discount carriers. Internationally where iPhones are available on more carriers, Android has not gained huge chunks of market share like they have in the US. I am guessing this is the jest of why Apple is looking at prepaid phones.

Evan

even internationally android is outselling Iphones collectively, although no phone comes close to the individual sales numbers of iphones. Your argument was correct for Q1 2010 or Q4 2009, not for Q1 2011, if anything android activations are ramping up, they increase from 300K to 350K per day from dec 2010 to feb 2011

http://twitter.com/davidchu @davidchu

For years analyst hammered Apple for not entering the 'net book' market. They said Apple was missing the boat and that low priced net books would eat away at Apple's laptop sales. Then Apple released the iPad and net book sales saw a negative growth rate for the first time.

I don't think Apple has missed the boat in making a low priced iPhone. They will address that market in time, but they will not sacrifice the user experience in order to do so. That also plays to their strength in the consumer market. Since each consumer votes for themselves, the market can shift very quickly.

Hamranhansenhansen

Yeah, it's more instructive to think of iPad as the little brother of MacBook Air than as the big brother to iPhone. When you do that, you realize the importance of the PC class screen (just a little bigger than the original Mac) and PC class native C apps (the language in which 99% of PC apps are written) and PC class browser. In spite of its small size, iPad is a real PC that takes over more than 50% of most users' PC time. With iPhone, the killer app is communication, but with iPad the killer app is applications. The baby apps on other mobiles are not going to cut it. Java and AIR are failures on PC's. PC's run C apps, that is all there is to it. The code is already written. Native apps that don't support C are as useless as Web apps that don't support HTML, and Java and AIR have failed at that as well.

So yes, iPad brings iOS back to Apple's roots. If you couldn't compete with iPod and iPhone, you are really in trouble trying to compete with iPad. Apple is easily the most successful PC vendor. They have 90% of the markets they compete in, are dramatically more profitable than their competitors, always have the technology lead, have the best brand, are the only one with their own platform, and they are also the oldest and longest-running PC vendor. And with Apple Store, they have the perfect consumer PC store.

I think a good proof of your premise is how HP TouchPad seems to be the only iPad competitor that makes any kind of rational sense. HP knows it is a consumer PC. They built it to sell at Best Buy next to the other consumer PC's.

ConciseFan

Regarding the iPad as a MacBook Air little brother, imagine a future 11" MacBook Air (September '11?) with a touch screen allowing iOS apps to be run.

Alan

Or consider a MacBook Air running whatever OS is after Lion but that uses the app launcher screen like in Lion exclusively and runs apps in Full Screen mode exclusively and downloads apps from the App Store exclusively but still runs regular OS X but on an ARM processor. 20+ hours battery life. Further blurring the lines between iOS and OS X.

davel

This is very interesting.

I agree that the primary difference between the phone and the pad is screen size and a cell radio tied to the telco.

Steve Jobs had it right, size does matter. You make a very good observation about the relative portability of the devices.

I agree that a year after its release, many still do not get the tablet. Some are dismissive about this tween product pointing out what it does not do.

I want to bring out two points with the phone. First in Europe in some countries the phones are sold unlocked so after you get the phone you can port it to another telco. Also last year it was rumored that Apple wanted to bring out a programmable phone. One where you can choose your telco, but Europe revolted and the carriers forced the genie back in the bottle. Again there are rumors of a lite phone that may be programmable. Ultimately Apple will provide a phone that can be programmed to work on any telco. Apple may also be its own telco if the infrastructure guys can provide enough coverage and bandwidth to allow a large bulk purchaser like Apple or Google to create their own network.

In the end I think the pad is a tweener device. Not quite a traditional computer that with the aid of a mature cloud infrastructure will be the primary electronic device for creating and consuming information be it business, entertainment or personal.

WaltFrench

“Never say ‘never’ ” about Apple, but I cannot imagine that they want into the played-in-regulatory-agencies game called “telephony.” They've done rather well inventing the future; don't know why they'd try to prove they're a badder dinosaur than the ones we now have.

Same reason I don't see them getting into cable. Let somebody else provide the regulated plumbing and just be the middleman for the content. A fine distinction? Maybe, but one that the iTunes store has already made.

davel

I understand what you are saying completely. However if they can find a spectrum vendor that works and build a service on top of that they can sell the kitchen sink. The trick with this scenario is to find a spectrum vendor that will not trip them up.

Someone like Clearwire comes to mind. I do not know how good they are, but they have spectrum and they are looking for partners. It is a big leap certainly, but I can see it happening. Don't know if it ever will for some of the reasons you proffer.

The fact that he believes the tablet will be bigger than the pc market in the future is not incompatible with my statement. In fact if I remember correctly Steve Jobs referred to the two devices as a truck and a car.

My point about the tablet, as Apple has defined it, is that it lacks features that a full fledged pc has. The missing features – large storage, content creation, etc – can be solved by the cloud. This would put the tablet form factor on more of an even footing with the pc in terms of functionality.

I think Apple really needs to offer a working cloud infrastructure. They don't really have one now. It would help make their mobile devices more useful.

Senator Gronk

Remember, the iPad was the product under development in 2005 when they realized it could make an amazing phone too… Apple isn’t making this up as they go along.

Michael

I'd always wondered why operator shops only carried dummy models.

One thing that has stopped me buying a new phone is that I need to talk to someone in the shop in order to even try something out… plus have them hover over me while I do.

Since a smartphone operating system has become more important than the hardware, this seems to be less and less useful to me. How can anyone buy a smartphone without trying it out first?

poke

The important thing to realise is that when somebody buys an Android phone it's likely the result of having been aggressively upsold by a salesperson at an operator's store and not because they were blown away by the UI and features or even had much of an idea of what Android is or does. Meanwhile, most people encounter the iPhone by interacting with it in a non-hostile environment (and by seeing ads that clearly demonstrate its features). This probably explains why Android users aren't buying apps or even surfing the web in the same numbers that iPhone users are. Android is primarily a means for carriers to sell more expensive plans.

Evan

how do you know that ? you should modify your statements thus, "the most important thing to realize ACCORDING TO ME is that…." truth is always more complicated and more fragmented than what one thinks or perceives. Carriers hold much lesser power in UK, and much much lesser power in India, so you are looking at everything from a US perspective right ? and specifically from the droid marketing campaign in Q4 2009, my god, that seems eons ago.

poke

I'm in the UK. All the stores I've been in here have display phones you can't use and you have to talk to a salesperson if you want to know anything about them. It's one of the most hostile retail experiences I've encountered.

I'm basing my assertion on the following:

(a) The nature of the retail experience (which is similar in the UK and US)
(b) What we know about Android app and web usage (it pales in comparison to the iPhone)
(c) The reasons given for owning Android phones by vocal advocates on the internet are obviously not the same reasons the majority of people buy Android phones (perceived 'openness', odd fixation on customising the home screen, hatred of all things Apple, etc)

AJS

I think you're quite right. My anecdotal experience with my circle of people is that the Android bunch aren't even aware of apps, much less actively go to the Android Market to buy them. Whereas the iPhone contingent actively speak of and share information about apps and if interested immediately buy them. In my admittedly narrow world view this makes the average, non-technophile iOS user much more savvy than the Android equivalent. But if you're the sort that likes to root phones just because you can, then Android probably is the OS for you.

Joey

We need to go back to Steve Jobs iPhone launch Keynote.
He said "A user (and Apple) would prefer to just buy their phone then go and shop for their service." Making the Telcos compete for customers on price and service. Not enslave customers with locked in contracts. That is why the original phone was not subsidized and tied to carriers.

berult

iOS is to mobile platforms what Geisha is to Prostitution. A Geisha deals a full house, Prostitution …two of a kind. The former is curated to be, the latter …pimped to deliver.

IPad is a natural expansion of the Geisha's 'cultivated', 'concretely abstracted' delicacy… iPad is simply iOS on a 9,7" grid, different in its metrical poetry, and yet so Geisha-like in its complicity…

Nate

What the what?

______

Welcome to berult's comments. You can read his comments, but you have to buy his product to truly "appreciate" them. Brilliant strategy really.

http://twitter.com/davidchu @davidchu

What happened? Moving away from the physics and chemistry metaphors?

Rob Scott

Apple refreshed iPhones once a year in June/July. When you said not now you actually meant not this year. If not, then there is no meaning in your "not now".

I guess that you concede then that Apple will expand their iPhone range THIS YEAR?

Adam Roth

Apple execs don't talk about future plans very often, so I'm sure Tim Cook is make a deliberate signal to the Street about what they're planning. Still, it's hard to see how AAPL can offer a low priced iPhone without threatening the margins of the existing product.
Consider, the iPhone's average selling price is north of $600, while it's bill of materials is around $200. This means that even if AAPL could conjure up iPhones *out of thin air*, they would still take a hit if they sold it under $400 (or free under contract).
Apparently, the specter of sub-$200 contract-less Android phones is upon us. Apple can't compete here without cutting their margins in half. Or unless they are seriously, seriously, "clever".

CndnRschr

This is only an issue if there is a threat to cannibalization of the current iPhone profit. The low end of the market could be targeted with significantly less capable phones which have little appeal to many current buyers but appeal strongly to those who cannot afford (or don't want to spend) the current range. However, the largest component of an iPhones cost isn't sold by Apple. It's the data plan. Hence, if Apple can find some way to cajole the carriers into a budget monthly dataplan, it might well hit a motherload of willing new buyers – especially in developing markets.

Adam Roth

Yes, any budget iPhone would have older tech that would cost less and be less appealing to those who afford the state of art. But they can only get the price down so much. What's the bill of materials for a 3GS today? As I said, even if they could make them for free, they can't sell them for $200 sans-subsidy and make what they make today.
And yes, it's the cost of service (voice+data+text) that is the barrier to entry. I agree. But that is *exactly* the subsidy. Without having to pay a $400 subsidy, the carriers would duke it out with $25 all-you-can eat plans, just like they do for cheap Android phones today.
so we're left with the same issue. Apple has to accept lower-margins (and the threat of cannibilization toward their high-margin iPhones) in order to produce the mythical $200 contract-less cheap iPhone.

WaltFrench

Simple business economics is that you sell more when you charge less, and that you maximize total profit when the cost of selling one extra iPhone equals the incremental cost of producing one more.

There are all sorts of other factors involved, especially network effects, where you may want to drive out a competitor or establish habituation by customers. When you're supply constrained, the cost of getting one more display screen to your factory might be many thousands of dollars.

Still, if the cost of producing one more iPhone is $350 (iSuppli's $187 doesn't include retail costs, warranty provisions, marketing, IP licensing and many other per-device costs), then Apple wins more total profit by selling 4*X phones @ $350 than they are by selling 1*X @ $600.

Yowsers

"…Apparently, the specter of sub-$200 contract-less Android phones is upon us. Apple can't compete here without cutting their margins in half…."

I don't think we're in a time where price is a competitive differentiator yet between Android and iPhone. It may come, but I don't see evidence of it yet. As others have pointed out, where Android and iPhones are sold side by side on a carrier, the Android sales suffer (even with buy-one-get-one-free deals).

I think Android has way too much yet to do in order to get a product that is comparable. Once they hit product parity (if), then price may be a differentiator.

Joe_Winfield_IL

I like the "out of thin air" comment. At $200 unsubsidized, Apple will need to sell 4+ times as many phones to match today's gross profit. And if the price is much higher than $300, it's hard to see Apple getting significantly better market penetration. This is a Catch-22 for Apple. The new phone has to be very obviously differentiated from the current models, or they risk cutting themselves pretty badly.

Fortunately, it appears that iPad is such an explosive growth story that the total cash flow will continue to accelerate. The timing could be perfect for Apple to announce a new tack on iPhone this summer, with minimized stock impact due to better than expected iPad sales.

davel

I don't know if they will sell a sub 200 phone today. Perhaps a 300 or 350 phone unsubsidized that does not have the features of the standard model.

I think it will sell well. They did this with the iPod and they do it with their PC's. They know how to delineate their product lines. They could do it if they want to.

As you point out and something I didn't think of, Apple does not telegraph their actions. Good observation by you.

Synth

I believe Apple could very easily make a $200 – $300 phone with 30 – 40 % margins. No it would not be the latest iPHone technology, but it could be iPhoneGS level tech.

1. The iPhone GS already sells for only $49 at AT&T–with two year contract.
2. The iPod touch, with a much, much better screen and cpu then the GS only sells for $229

So making a $200, GS-level, no-contract iPHone seems very, very possible. It would have to have at least GS screen resolution and decent cpu to take advantage of the ecosystem, but I don't see Apple having to sacrifice margins at all.

yet another steve

Acute observation. In fact the amazing performance of AAPL as a stock hides the fact that short term Apple Inc has never much cared about the stock price. This is probably the first warning to Wall Street that Apple's strategy is long term and based on maximizing penetration, and that margins may be sacrificed.

The PC market is mature and it would make little sense to give up Mac margins… (or license the OS.) Windows attrition will still happen on its own timetable (as much threatened by iOS and iPad than the mac.)

You can't say that about the mobile and smartphone markets. The iPhone margins are an embarrassment of riches– Apple collecting its $3-400 of margin on what is really about a $2,000 purchase. Cutting its margins would barely make a dent in the total life of contract cost. And Apple is delighted to pocket the billions. BUT in no way have I ever thought or seen any evidence from Apple execs that this is a strategy to make the iPhone the mac of phones. Instead I think they're waiting until the costs/technology/telcos/supplier capabilities hit the point where they can grow volume with a lower cost (but true iOS) experience. When the opportunity is there, Apple will absolutely sacrifice margins.

Meanwhile the iPod touch fulfills that role of a much lower cost iOS experience.

http://twitter.com/davidchu @davidchu

People once thought that there wasn't a market for a tablet device.

Who knows what Apple has up their sleeves, but I guarantee you that it's something good.

Evan

true, but people once thought android devices won't do as well, I think we will at some point this year, hit a 1 million android device activations per day milestone. Android is the best disruptor ever in the history of technology, everybody(except Apple) has been scarred permanently by it. I tell not from the point of view of revenue or profits, but from the perspective of impact.

maybe not 1 million, but 500 or even 600K activation rate per day is possible. I think Windows 7 at the peak hit about 600K licenses per second

Evan

maybe not operators, but what about bestbuy, walmart, costco or carphone warehouse ?

asymco

Granted there are retailers with a license to sell iPhones but they are very few, hand-picked and given specific guidelines on how to sell it.

ayedee

Why? Why be so selective for iPhone, but not iPad?

Westechm

Actually, the tablet was in development before the iPhone. I believe the iPhone went to market first because the subscription model helped it overcome the high initial costs.

In the long run the subscription model in unsustainable. As volumes grow and costs come down people will become less willing to pay for multiyear contracts unless monthly charges come down substantially. I have a wifi only iPad, purchased in April last year. I don’t get my data via the telcos, and this is the wave of the future. Lower cost smart phones without a contract are inevitable. Apple clearly has the lowest cost structure for both smart phones and tablets. They are well aware that keeping a price umbrella over these for too long is an invitation to the competition to try to undercut them on price. Introducing lower cost products with minimum impact on the price (margin) of the higher cost versions is obviously a challenge, but unlike Microsoft they will not ignore the inevitable. If a new product cannibalizes an older one, so be it.

I believe that Apple can make a smart phone that will work on all networks for under $150, maybe as low as $100. They have the software technology to enable the phone to seek out a network on a pay as you go basis. The Telcos will hate it, because it limits their value-added to the relative capabilities of their network to the actual services provided. Dumb pipes.

It will have a front facing camera. No retina display, too expensive. Limited storage size. Other components at lower cost. Performance OK but not top of the line. It will retail for $250 or less without a service contract. The real issue is not whether they will make it but when.

The iPhone 5 will still be top of the line, new features, improved performance, some additional surprises, possibly lower price or a smaller subsidy.

http://twitter.com/judsontwit @judsontwit

Perhaps carriers have no value they can really add. The carrier-driven mobile service oligarchy in America masks this quite well, however.

So it's fascinating that the device-experience-as-value paradigm is breaking the first cracks in this facade.

http://twitter.com/44sunsets @44sunsets

Actually, I don't think Apple will release a new iPhone/iPod touch without a Retina Display — seriously, why would you go backwards? They could always use the cheaper Retina Display of the iPod touch which uses a TN panel.

Alan

Actually the low end iPod touch has at least some times been from the previous generation. I think touch might be a better comparison to iPad than iPhone is.

millenomi

Note that the iPhone is not sold exclusively through operators, but adopts a country-by-country strategy in which Apple may sell the phone directly (via online and physical Apple Stores) if doing so is advantageous (e.g. Hong Kong, Italy) without tying the user to a data plan. This is not incompatible, and in the cited cases occurs alongside, operator subsidy, but allows the phone to have a larger presence in countries where subscriptions are frowned upon in favor of pay-as-you-go contracts.

Westechm

I forgot to note that the 8GB iTouch retails for $229. How much does a phone module cost? $15?

Synth

Exactly. I think Apple has lots of options to create a $200 level no-contract phone which can still take advantage of the App ecosystem.

And blow the market wide open.

This is what Google thought it would do with the Nexus, but it was way too expensive, and Google had very poor retail distribution and crappy tech/customer support.

I keep seeing the bottom of the iPad line as a top-of-the-line iPod. A 5-inch screen iPod Touch — same pixel count as an iPhone 4, or perhaps that of an iPad 1 or 2 — would make a killer line extension. A 5-inch screen device, with borders trimmed to a minimum, will still fit into a pocket, unlike a 7-inch tablet. What are you going to do as a competitor if you're bracketed by the iPad 2 in the middle, an iPad 2 HD with retina display at the top this fall or winter, and a iPod Touch XL at $249 or even $199 at the bottom? With Facetime and nearly ubiquitous wi-fi, such an iPod Touch would even make a reasonable phone alternative for some. Long term (3-4 years) is there any role for the carriers except as commoditized dumb pipes?

Fake Tim Cook

An iPod Touch with a SIM card?
Pre-paid available exclusively from T-Mobile?
$10 for 50 minutes of talk
$10 for 100MB of data
$10 for 250 text messages

Ravi

T-mobile has been bashing the iPhone (about 4G in particular) every chance they get. I'd guess that they know they won't get an iPhone soon (else why go all-in on the iPhone bashing)? Of course, these things can change (see Verizon), but I suspect they won't get an iPhone this year.

I think Apple would only launch the iPhone on T-mobile if they can pull off penta-band. It wouldn't surprise me if that's a significant engineering challenge. And since the only operators they get with penta-band are T-mobile (#4 US carrier) and some Central / South American carriers I don't think it is a priority.

PatrickG

Horace, I wonder if a review of the iPod approach would be in any way revealing to how Apple might strategize the mythical cheaper iPhone? After all they began the iPod platform with just what became known as the Classic, and then expanded into the smaller and less expensive mini, nano and shuffle lines. It's possible that that would be a desireable model to emulate because it would steal some wind out of low-end Android "smartphones", while adding some additional marketshare to the product line. I think once a year more (or two perhaps) of the iPad has established the product line, that a smaller format iPad could become a target line expansion as well. But note the deliberate planning around these line expansions. If you look across all of the product lines you see very well-strategized and positioned introductions of the new product expansions.

davel

I think that is exactly what they need to do. I am hoping they do that. It will give consumers a limited feature choice and more importantly a choice in price points. Of course they need to do that while keeping the iphone standard for the development platform.

Ravi

In terms of Android tablets, I think you're correct to discount the *operator* channel, but there are other players in the game. For instance, the best selling Android tablet isn't made by Samsung or Motorola or HTC or any other traditional player. The best selling Android tablet is the NOOKcolor, by Barnes & Noble. They may not market, sell or deliver them that way, but NOOKcolors are full-featured tablets and I think that will come out eventually.

More generally, I think the big Android tablet success stories are going to come from "left field" like that – unexpected ways of packaging Android in a tablet-like form-factor that turn out to be surprisingly useful and popular.

Psymac

Why should Apple care that much about the middle share of the market when they already earn the lion’s (pun intended) share of profit with their existing stragey?

Westechm

Because in changing markets you can't stand still. If there is a good market opportunity you better grab it before someone else does. In the iPod market the mini, nano and shuffle foreclosed the competition. If they stayed just with the classic others would have filled that gap and chipped away from below.

dbaggett

Hi Dick, Do you really think Apple will need to lower the price for the iPad2? I wonder if the iPad1 will be discontinued, or will be continued (a la iPhones) precisely to provide an overlap, so they don't have to shut down a plant completely just to provide an upgrade, and continue to make two versions indefinitely, with the 3rd iteration the impetus for shutting down the first. If so, the iPad1 could drop to $399 wifi only, and introduce the iPad2 wifi at $499. XOOM (caps emphasized and snickered at) has enough trouble competing right out of the box. Would love to see iPad3 (2.5?) this year (in Sep) with the HD "retina-like" display, and I would gladly pay $100-200 extra just to get the display, all other refinements the same. This all assumes that the battery life is comparable to iPad1 (and I guess Apple is working on this feverishly).

http://twitter.com/GamaGanda @GamaGanda

I agree with most of things you've said in this piece, except one. The iPad doesn't have a LOW price. It is priced for penetration, but only if we consider the whole Apple strategy of bringing products to market. If we consider the whole tablet market, then those Android no-name tablets are indeed priced low (at around 200USD/EUR). On the other hand, the iPad's price translates into 500 EUR in Europe, which for me, for example, is too high. I really hope they'll keep v1 and continue its sale for around 300 USD/EUR, which I consider the sweer spot (for many European countries). Unfortunately, I don't think they'll do that for a very long time (just until their stock is depleted).

http://www.timacheson.com/ Tim Acheson

Yes, this is a crucial obstacle facing tablet vendors.

One very interesting point:

“Tablets are small computers. They are bought in the same way that buyers buy laptops…”

Exactly! For that reason, Microsoft is positioned to dominate the tablet market:

iPad isn’t good enough to replace laptops, not even close, it’s a toy.

You can already have a full-power PC in tablet form, like the Asus Eee Slate.

Apple brought a knife to a gun-fight.

http://twitter.com/GamaGanda @GamaGanda

You cannot compare the iPad with Asus Eee Slate. The Eee Slate base model will retail for 1000USD, which not only suggests that Asus has a different strategy with this tablet than Apple with iPad, but it also tells the customer it's a different product all together (which it is, considering specs).

iPad will not replace laptops, but it has already taken quite a big part of the laptop/netbook market and there are many graphs out there (many sources) showing exactly this evolution. Laptop/netbook manufacturers where completely unprepared for this, as Apple identified perfectly the needs of SOME of their customers, which were willing to switch given a better alternative (meeting their needs). The iPad.

It's all about how you segment the market and keeping an open mind/eye. This is why I like Asus' pricing of the Eee Slate. It specifically targets the power user who, instead of pay 800-900USD, is willing to pay a little extra for that definite bang for the buck (Core i5, 2-4GB ram, SSD, Windows 7). The only question is, what happens with the Macbook Pros if this strategy is adopted by more manufacturers?

http://twitter.com/judsontwit @judsontwit

The problem is that the way people buy laptops today…is actually increasing Apple's share of the PC market.

You're assuming that because Microsoft still dominates an old market, that it will achieve domination of a market it hasn't even entered yet.

But that is not how it works. You must create a product first, and Apple has demonstrated that even in a market they should have already lost (PCs) they are taking back share from the Intel/Windows device pool, twenty years later.

djbtak

I think this post overstates the difference in strategy when you take it out to the global market. In a number of markets the iPhone is sold unlocked at a high price point, even not on a contract. This is just the same strategy as the iPad, and it is what Apple want to do as a high-end electronics manufacturer. All the network deals have been market entry strategies, I don't think they have any long-term strategic interest for Apple at all (whereas, they do for the operator).

asymco

There are exceptions to every rule. The number of iPhones sold unlocked without contracts must be quite small (<<10%).

Andrew

Horace,

Good points. Let's forget iPhones, iPads and other mobile devices for a moment and go back to how regular PC users got connected to the internet, say 10 years ago.

Bulletin Boards, members-only networks and operator-subsidized PC's all failed. Users wanted compatible devices that gave them the full internet. This meant they wanted to choose the best hardware independently, and wanted to choose the best ISP for their network connection. They wanted it in their own language and their own currency, but they wanted to be able to connect globally, with no restrictions and no extra costs.

Mobile users today want exactly the same deal, but it's not available yet. I am sure what those users want coincides more with what Apple wants: they want to choose the best mobile device, and then they want to choose the best service provider. Tying the choices together means they must be faced with inferior choices.

Separating them means the consumer wins, and Apple, if it makes the better hardware, also wins. The service providers lose their monopoly pricing, and if they are worse than their competitors they lose more, which means consumers win more. In this case, even Android or Win7 device makers can win if they make better products.

Apple's "Not for the Rich" strategy must be in two parts: 1. lower-cost hardware, using earlier model components that still provide the iPhone experience for less demanding users; 2. lower-cost data plans, using more flexible pricing not tied to regular monthly charges. The latter may mean some arbitrage pricing that allows users, or their iTunes account, to negotiate the lowest price call options, on a monthly, per call or even real-time basis.

At that point, Telcos can only survive by offering the best service for the lowest price. The low value Telcos will lose. The consumer will win.

Andrew

So how does this relate to the iPad?

Well, in introducing the iPhone, Apple has had to work with the Telcos to gain acceptance of better hardware and a better experience. I think of it like opening a Mac Mini case with a plastic blade, one not-visible clip at a time. Sometimes, having two plastic blades helps.

The iPad is chipping away at different areas of the current Telco monopoly from the iPhone. Both of them have to work slowly, one clip at a time. Eventually, they will meet and the lid will come off the status quo.

davel

Andrew,

I agree with you. However, the reality is that it is hard to build a wireless network. So you end of with oligopolies with deep pockets. What this means is you don't have a lot of choice. I am not sure how things grew up in Europe, but in the US you have only 4 networks. Pay as you go plans are cheap on a relative basis but not very flexible. Most plans charge a dollar just to use it for that day plus other charges.

Because of this, at least in the US market, you will have to deal with the telcos for a long time. Each telco has its pluses and minuses.